Western Digital Stands to Gain From IBM Deal : Computers: The Irvine firm could generate $50 million to $150 million in sales as a key supplier for new laptop.
A major deal to supply key components for International Business Machines Corp.’s new laptop computer could generate $50 million to $150 million in sales this year for a financially struggling Western Digital Corp., the company’s chairman said Tuesday.
The actual amount of Western Digital’s revenue will depend on the acceptance of IBM’s PS/2 L40SX laptop, formally introduced on Tuesday. But analysts said the IBM deal will aid the computer-component company’s efforts to return to profitability.
Western Digital Chairman Roger Johnson said the deal to manufacture chips and electronic circuit boards for the IBM laptop could make up 5% to 15% of company revenue in 1991. The Irvine-based firm had revenue of $1.1 billion for its latest fiscal year ended June 30, 1990.
“The revenue stream from this product is a key part of our future plans,” Johnson said in an interview.
Analysts said the timing of the introduction couldn’t be better for Western Digital, which reported a loss of $98.5 million for its second quarter ended Dec. 31.
“They have other things to do” to beef up earnings, said John Geraghty, an analyst at First Boston Corp. in New York. “But this is certainly a step in the right direction.”
Western Digital stock closed Tuesday at $5.375 a share, up 37.5 cents in New York Stock Exchange trading.
The company will be the sole supplier of a set of microchips that control the logic functions for the IBM laptop. Johnson said the chip set will bring in most of the revenue Western Digital expects to get from the IBM deal.
For the time being, Western Digital will also manufacture the motherboard, or main processing board, for the laptop at its Irvine plant, Johnson said. IBM, however, plans eventually to make the boards itself.
The two companies have been working together since late 1989 on development of the laptop, which, for IBM, represents its third effort to successfully crack the fast-growing, $5-billion laptop computer business. Johnson said he considers the joint development project a validation of a key company strategy.
Western Digital has followed a strategy of becoming a kind of one-stop supermarket by supplying a wide variety of components for PC makers. More recently, the firm has focused on designing components concurrently--that is, designing two related chips simultaneously rather than separately. The idea is that products designed together will work together better than those developed independently.
On IBM’s laptop, for instance, Western Digital simultaneously designed a set of five logic chips as a single chip set so that the machine would consume power far more efficiently than previous laptop computers, company officials said.
Paul Mugge, an IBM vice president, said IBM worked more closely with Western Digital on the laptop’s design than with any other supplier.
“You could look at Western Digital as the nerve center of the machine design,” Mugge said. “They have the ability to bring a whole systems view to the problem. That is what makes them so appealing to work with.”
During the design process, laptop computer technology was changing rapidly, and this led to numerous design changes. For instance, the largest-capacity disk drives available for laptops grew from 20 megabytes to 60 megabytes of storage, about the same capacity of the average desktop computer.
But contrary to some published reports that said the IBM machine was due out last fall, Mugge said the introduction was delayed only one month because of the company’s rigorous testing process. The product was 15 months in development, faster than the 18 to 24 months that IBM originally had projected, he said.
Analysts noted that Western Digital’s relationship with IBM was closer than they originally expected.
Raj Rajnaratnam, analyst for Needham & Co. in New York, said he was surprised to learn during a conference call with Western Digital officials that the Irvine firm is still a contender to supply 60-megabyte disk drives for the IBM laptop. Conner Peripherals Inc., a San Jose-based rival of Western Digital, is IBM’s current supplier of disk drives.
Johnson said Western Digital has no agreement to act as a second source of disk drives for the IBM machine. But as Western Digital ramps up production of its own 60-megabyte drives later this year, it will try to win more contracts with IBM, he said.
A contract to supply disk drives to IBM could boost Western Digital’s revenue from IBM laptop-related components to about $150 million this year, Johnson said.
Rajnaratnam still estimates that Western Digital will report losses for its third and fourth fiscal quarters because of the weak economy and continued losses in its board-manufacturing business.
But he said the IBM deal could help return the firm to profitability in the first quarter of its fiscal 1992 year, which ends Sept. 30, 1991.
